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‘Framing’ Prevents Needed Stimulus

WHY have so many teachers, police officers, firefighters and other public workers been laid off since the financial crisis hit — and why are so few being offered new jobs now?

From July 2008 to July 2012, the number of state and local employees nationwide fell by 715,000, according to the Bureau of Labor Statistics. The reality is actually worse than that figure suggests. The total ended up 1.31 million people below where it would have been had public sector employment simply kept pace with population growth.

The situation did not improve as the financial crisis eased and the economy picked up. From March 2009 to March 2012, the nation’s total nonfarm employment increased 0.6 percent. State and local government employment, by contrast, fell 2.9 percent.

It is not as if many Americans say they want this to happen. A CBS News-New York Times poll in July asked: “Looking at your local public schools, would you be willing or not willing to have shorter school days or more crowded classrooms if it meant you would pay significantly less in taxes?” Seventy-four percent of respondents replied that they were “not willing” (21 percent were willing and 5 percent were unsure). When similar questions were posed about firefighters or police officers, the percent “willing” was even lower (12 percent and 15 percent).

Keeping the number of teachers, firefighters, police officers and other public employees in line with the local population seems sensible enough, even if it means higher taxes. Granted, no one likes paying higher taxes. But in this case, the result would be a more livable community and more local jobs.

Why, then, did governments do what they did? One answer comes from the field of behavioral public finance, which applies psychology to the world of taxes. What actually happens with tax policy in the political marketplace may be entirely different from what we would choose if, as a community, we focused on salient questions. Bruce Ackerman of Yale and James S. Fishkin of Stanford have proposed a new national holiday, Deliberation Day. Before an election, everyone would get Deliberation Day off and be paid to attend community meetings. The idea would be to encourage communities to share information.

Maybe one day. For now, however, many citizens simply are not engaged. And when that is the case, public decisions can become quixotic and arbitrary. In their 2006 book Behavioral Public Finance, Edward J. McCaffery of the University of Southern California and Joel B. Slemrod of the University of Michigan summed it up by saying that in real-world public finance, “form matters.”

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Carl Wiens

They were applying to public finance the psychological principle of “framing” — the notion that when people make decisions without enough deliberation, consultation and information, they are easily influenced by superficial forms and irrelevant details of presentation or wording.

In most communities, it is difficult to hold tax receipts steady, let alone increase tax rates, given the recent (and projected future) declines in assessed values and the public’s general resistance to seeing tax rates go up. Many people view substantial increases in property tax rates as unfair, even if the resulting revenue is used for services the community wants. Professor Slemrod calls this the metric effect.

POLITICIANS are not in complete control of framing. Property owners get a tax bill every year, and that bill is highly salient when presented: its form frames the issue. News of property tax increases is shared among neighbors or colleagues, who mostly talk among themselves, and who would not be personally threatened by job cuts in the public sector.

A good part of the benefits of tax increases go to as-yet-unspecified public workers who would otherwise be laid off in the future. We naturally care less about people we do not know than those we do.

Deborah Small of the University of Pennsylvania and George Loewenstein of Carnegie Mellon University have run experiments that show that people are more sympathetic to “identifiable victims” than they are to “statistical victims.”

In a 2003 field experiment, they sent subjects an appeal to contribute to Habitat for Humanity to help build a house for a needy family. Two letters were sent, and they differed by just three words. One said the needy family “has been selected” from an enclosed list. The other said the family “will be selected.” People who received the first letter (about identifiable victims) gave 25 percent more than those getting the other letter (about statistical victims).

Politicians sometimes avoid creating identifiable victims when they raise taxes, as they do, for example, with the corporate profits tax, which seems to be paid by abstract entities, rather than real people. But there are limits to their ability to raise such taxes.

Politicians can sometimes find other frames to raise taxes in the public interest. Prohibition was ended early in the Great Depression, when government budgets were in deficit. That was no coincidence. Many politicians were seeking to find a new source of tax revenue, in the form of liquor taxes, without creating an identifiable victim by raising tax rates. Governments mostly have run out of other avenues to do that.

But politicians keep trying to manipulate the framing of taxes. At their convention this week, Democrats may refer to specific, identifiable victims of unemployment, as Barack Obama did at the 2008 convention, when he described the “man in Indiana” who lost his job to China.

All of these efforts to manipulate framing, however, are dwarfed by the natural framing that occurs in real life, away from the television sets, and that prevents active government stimulus and so perpetuates an unfortunate slump.

Robert J. Shiller is professor of economics and finance at Yale.

A version of this article appears in print on September 2, 2012, on page BU4 of the New York edition with the headline: ‘Framing’ Prevents Needed Stimulus. Order Reprints|Today's Paper|Subscribe